UK offshore: better luck next year

It was supposed to have been a breakthrough year for UK offshore wind. In autumn 2012, all the pieces seemed to be in place.

The government was set to introduce its energy market overhaul to Parliament, with the offshore industry cheerfully assuming the bill would sweep away the many lingering policy uncertainties.

Turbine makers such as Siemens would commit to British factories as details of the Electricity Market Reform (EMR) emerged, predicted energy secretary Ed Davey, and the government would help things along with its long-awaited Offshore Wind Industrial Strategy.

By any measure, 2013 has been a year of significant policy announcements for the UK offshore wind sector, and several big projects were indeed commissioned. Yet that doesn’t soften the demoralising reality that the industry will close out 2013 feeling more frustrated and uncertain about its future than it did 12 months ago.

The biggest disappointment has been the evolution of — and response to — the EMR package.

The government published the draft strike prices for the impending Contracts for Difference (CfD) scheme in June, earlier than expected, hoping they would incite a rash of investment decisions.

Instead, most of the CfD announcements made have provoked an industry backlash — a reaction which appears to have genuinely taken the government by surprise. 

RWE — co-owner of the Galloper, a project expected to reach final investment decision (FID) in early 2014 — tells Recharge that it will be “very difficult” for it to take the project forward under the current CfD strike prices. Those prices — starting at £155 ($247) per MWh in 2014-15 and falling to £135 in 2018-19 — are based on outdated assumptions, RWE says. They do not account for the fact that Europe’s battered utilities are in no position to finance all the projects in the pipeline — and that new types of investors will require higher rates of return.

Many industry players suggest the steady strike price degression is inappropriate for offshore wind, as it assumes that costs will start dropping immediately and continue to do so in a linear fashion.

While the draft strike prices seem to be industry’s biggest gripe with the EMR, they represent just one of many outstanding issues.

Other concerns include the fact that CfDs are only offered for 15 years, shorter than the 20-year payback period under the existing Renewables Obligation, and when the UK will receive State Aid Clearance from the EU for its EMR package.

Add these factors to other destabilising announcements of late — such as opposition leader Ed Miliband’s pledge to freeze energy prices should his Labour Party win the next general election — and the industry has been left with very cold feet.

Centrica says it will not make its mind up on its 580MW Round 2 Race Bank — another key project in the UK pipeline — until the “final outcome” of the EMR package is in hand, probably some time next year.

More shocking was the claim in October from SSE chief executive Alistair Phillips-Davies that the utility will hold fire on FIDs on projects until at least 2015. Although unlikely to be approved, Scotland’s independence referendum next year will also factor into the thinking at SSE.

Questions about EMR represent a significant headwind for the sector, but should be laid to rest — for better or worse — by next year. Potentially much more damaging is another fear that has crystallised in the industry’s mind this year: that the UK may end up with far less offshore wind than had been predicted a few years ago.

A growing body of research and expert prediction — much of it coming from government — justifies this concern. National Grid, for instance, now says the UK may have as little as 8GW of offshore wind capacity in 2020 — a far cry from the 32GW ambition touted a few years ago.

If all projects currently under construction are built out, they would bring the country to 6GW — leaving just 2GW still up for grabs.

The government happily acknowledges that the sector has the potential to vastly exceed expectations. But for potential investors — especially in the supply chain — it is difficult to see beyond that 8GW figure. Some say that interest in Round 3 would have been far more muted had such a figure been used at the time of bidding. 

Superficially, the government remains optimistic about offshore wind. But its cheerful tone masks a critical shift in its emphasis over the past year, sources say. Where the government used to appear primarily concerned with ensuring a successful offshore wind industry, it now seems more concerned with meeting the country’s 2020 renewables targets at the lowest possible cost.

A number of factors may be behind this shift. Envy of the US shale-gas boom, which has sparked a manufacturing renaissance due to low energy prices, is obvious in the government.

The political imperative to lower energy costs — or at least appear to be attempting to do so — has grown sharply.

Meanwhile, the rapid decline in the price of solar energy, the progression of private-sector plans to build more power interconnectors with other countries, and improved prospects for large-scale biomass, may have opened the government’s mind to previously unconsidered options for meeting its renewables targets.

If there is one thing that could immediately and dramatically alter perceptions and priorities, both among government and the public, it is the commitment of a major wind-turbine manufacturer to building a factory in Britain. Yet here, too, 2013 has proved disappointing.

Siemens has long seemed closest to pulling the trigger. Nearly three years have passed since the German giant unveiled plans for a turbine factory at Hull, northeast England. The factory would seem to make sense, given its proximity to the 4GW Hornsea zone (partly owned by Siemens Project Ventures), where offshore construction could commence as soon as 2016.

Yet Siemens has repeatedly delayed making a final decision and still refuses to do so, despite the government’s almost comically intense arm-twisting campaign. With expectations for the sector apparently shrinking, and antagonistic noises about renewables coming from some corners of government, it remains unclear when — or if — Siemens will give Hull the green light.  

Other mooted turbine factories yet to attract investment decisions include Samsung’s proposal for Fife, and Mitsubishi and Gamesa in Edinburgh. REpower, Areva and Alstom are also known to be considering UK plants.

“I think we’re at a very clear tipping point in the industry’s development in the next six months,” says one insider. If potential supply-chain investors don’t see improved strike prices and a “restatement” of government expectations for the sector, then “I really do believe you’ll start to see the withdrawal of the existing players from future investments in this industry”, he says.

It is not all bleak for UK offshore wind, however. The vast amount of capacity that entered the planning system this year — from Dong’s 750MW Walney 3 in the Irish Sea to the first zones within Forewind’s 9GW Dogger Bank — indicates that there is still huge appetite to develop projects in UK waters, assuming the government doesn’t play its cards too poorly.

After its flotation this summer on the London Stock Exchange, infrastructure fund Greencoat UK Wind promptly acquired a 25% stake in RWE’s 90MW Rhyl Flats, potentially signalling an influx of new capital into the market from new sources.

This year Siemens has commissioned three of its new 6MW machines around the UK, and Samsung has finished installing its 7MW prototype last month. Both companies will soon be piling up reams of valuable performance data, greatly improving the case for a factory.

Turbines aside, the UK supply chain continues to develop along other less visible segments. Belfast-based Harland and Wolff is building the jacket foundation for the offshore substation at E.ON’s under-construction 219MW Humber Gateway, while Hartlepool-based JDR is delivering array cables for Germany’s 400MW Meerwind project — a key demonstration of the UK sector’s export potential. 

Ironically, bottlenecks in competing offshore wind markets, including Germany and Belgium, and slow progress in the future markets of China and the US, mean that Britain has not lost as much lustre as it could have.

EMR notwithstanding, the UK remains the world’s “most attractive” offshore wind market, according to the most recent edition of Ernst & Young’s renewables attractiveness index. And with nearly 4GW in the water, the UK holds the lead in global installed capacity by a country mile — a title unlikely to be contested any time soon, if ever.  

Still, for all its accomplishments and inherent advantages, the UK offshore wind sector could be forgiven for looking back on 2013 with a sense of disappointment and creeping anxiety.

It would have been nice, for once, to feel as though the wind were at its back.